A look at key UK monetary policy issues - Philip Shaw Chief Economist Investec
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A look at key UK
monetary policy issues
Philip Shaw
Chief Economist
InvestecA look at key UK monetary policy issues
BREXIT
www.ukalma.org.uk Philip Shaw, InvestecBrexit timeline
29 Mar 2017: Article 50 invoked
6 Jul 2018: Chequers plan agreed amongst the then Cabinet
25 Nov 2018: Draft EU/UK agreement signed off at EU Summit
Dec 2018: Govt pulls meaningful vote (was planned for 11 Dec)
12 Dec 2018: Theresa May survives Tory leadership confidence vote
15 Jan 2019: Govt loses meaningful vote in Commons
29 Jan 2019: May’s ‘Plan B’ gets backing with a ‘backstop’ amendment
Mid-Feb? Another meaningful vote and/or statement on May’s plan.
29 Mar 2019: UK leaves EU (?)
31 Dec 2020: UK leaves implementation (transition) period?
www.ukalma.org.uk Philip Shaw, InvestecChequers - the govt’s plan ahead?
Services
How to go forward? Goods trade
arrangements?
• Simple free trade • Free trade zone in • Chequers says
agreement implies goods. relatively little about
customs & • UK accepts relevant services.
regulatory delays at EU rulebook. • ‘regulatory flexibility’
UK/EU border. • Tariffs from 3rd • In financial services,
• Customs union with party imports looser ties
EU prevents UK achieved through (compared with
striking 3rd party collection and passporting).
trade deals. distribution of tariffs
• Huge issue for UK at UK border and
industry. distributed to EU
• Government (Facilitated
Chequers plan Customs
seeks best of both Arrangement).
worlds.
www.ukalma.org.uk Philip Shaw, InvestecWithdrawal Agreement (WA)
Leaving arrangements dealt with in 585 pages of text.
The WA covers the financial settlement (€41bn) and rights of
EU citizens in UK (relatively uncontentious).
The NI/RoI border remains a huge sticking point. In terms of
the backstop as currently negotiated…
• From 2021 (post-transition), UK would be in a customs union with EU. In addition,
NI would also be in regulatory alignment with EU. Two problems here:
• UK cannot unilaterally withdraw from backstop.
• Some goods checking necessary between GB and NI.
UK in the backstop in the absence of a ‘frictionless’ border
between NI/RoI. Or may extend transition by 1 or 2 years.
WA is a legal treaty.
www.ukalma.org.uk Philip Shaw, InvestecPolitical Declaration (PD)
PD looks at the future relationship between UK and EU.
• 26 pages long! (Original version was 7 pages).
• Openly worded.
• Includes arrangement to ‘create a free trade area, combining deep
regulatory and customs cooperation’.
• On services, talks of ‘ambitious, comprehensive and balanced
arrangements’. Financial services - assessment of equivalence…
Consistent with Chequers Plan, but without committing…
(‘can lead to a spectrum of different outcomes for
administrative processes as well as checks and controls’)
PD is NOT legally enforceable (but parties will use ‘best
endeavours’ to negotiate details).
www.ukalma.org.uk Philip Shaw, InvestecParliamentary make up
Key
Speaker
Conservative
Labour
SNP
Lib Dem
DUP
Independent
Plaid Cymru
Green Party
Diagram shows the results of the 2017 general election (i.e. does not reflect
MPs who have been suspended or resigned from the party whip). Seven Sinn
Féin MPs not shown due to party’s policy of abstentionism.
Source: Electoral Commission
www.ukalma.org.uk Philip Shaw, InvestecMeaningful vote (15 Jan)
Plaid Cymru, 4
500 Green, 1 Independent, 5
400 DUP, 10
SNP, 35
Rebel Rebel Labour
300 Conservative Lib Dem, 11 Independent, 3 MPs, 3
MPs, 118
200
Labour MPs,
Conservative
100 248
MPs, 196
0
Voted against Voted for
the deal (432) the deal (202)
The chart shows numbers of votes. Excludes ‘tellers’, the Speaker and deputies.
Source: BBC research, Investec
www.ukalma.org.uk Philip Shaw, InvestecThe issues for Parliament
The problem is that Compromise is required. Note 118 Tories voted against PM’s deal.
Parliament is very May lost by 230. If all Tories had backed deal, PM would have won
divided. (without DUP)!
Can UK agree better terms on backstop and PD?
Now back to
Brussels… Will Ireland allow backstop compromise to prevent ‘no deal’?
How many Labour MPs will back govt at last minute?
Extension to Article 50 For more negotiations or to legislate in Westminster?
possible. But for how European Parliament (EP) elections are in late May and new
long? European Parliament sits in early July. Also, all EU27 have to agree.
Political cost of a delay
(to government) could
be huge. Revoking Article 50 (which is legal, according to ECJ) would be worse.
No deal hides a
number of different …(from delay in agreement to totally dysfunctional). But risk of port
scenarios… snarl ups is real.
Our baseline forecasts are based on a deal going through
www.ukalma.org.uk Philip Shaw, Investecwww.ukalma.org.uk Philip Shaw, Investec
Leaving all that behind… www.ukalma.org.uk Philip Shaw, Investec
We now have monthly UK GDP data…
(% change 3m/3m and ppt contributions by component)
Source: Macrobond
www.ukalma.org.uk Philip Shaw, InvestecLabour market has been robust
Source: Macrobond
www.ukalma.org.uk Philip Shaw, InvestecWhat is productivity, and why is it important?
Low GDP growth, high jobs growth implies low (labour)
productivity growth.
Productivity (output per hour) growth averaged 2% per
annum pre crisis. Since 2010 this is now a little more
than 0.5%.
Does this matter? YES!!! Determines trends in living
standards.
Why is it weak?? Financial crisis? Lack of investment?
Wrong type of jobs? Education?
www.ukalma.org.uk Philip Shaw, InvestecProductivity growth in pictures – annual change
in output per hour worked
Annual % change in GDP per hour worked
Source: Macrobond
www.ukalma.org.uk Philip Shaw, InvestecBoE policy – what will the MPC do?
Background Our assessment Points to note
• ‘Trend’ growth has • Current Bank rate at • Fiscal policy expansive
slowed. 0.75% (MPC hikes Nov (£25bn from last two
• Unemployment: 4%. ‘17 and Aug ‘18). Budgets).
• There is little spare • No change likely 7 Feb. • Some relationship
capacity (BoE sees full • But we see Bank rate between
employment at 4.25%). at 1.25% at end-2019. unemployment and pay
• MPC concerns – tight • Why? growth has returned?
labour market / higher • GDP growth of 1.7%. • What will the MPC do
pay growth / medium- on a ‘no deal’ Brexit –
• Baseline forecast of a
term inflation pressures balance of supply and
Brexit deal being struck
• CPI inflation close to demand??
(!).
target (2.1%). • Trade talks between
• Global economy still
• Uncertainties over US and China are
reasonably robust.
Brexit (especially risk critical – major factor
of ‘no deal’). determining global
growth.
www.ukalma.org.uk Philip Shaw, InvestecIs the Phillips Curve relationship re-establishing
itself (in another place)?
Source: Macrobond
www.ukalma.org.uk Philip Shaw, InvestecMarkets are not pricing in the next hike in Bank
rate until 2020
Implied Bank rate from OIS curve versus Investec forecast (%)#
1.50
1.25
1.00
0.75 Hike priced in more than one
year later than Investec forecasts
0.50
Feb-19 May-19 Aug-19 Nov-19 Feb-20 May-20 Aug-20 Nov-20
SONIA (29/11/2018) SONIA (28/01/2019) Investec Economics
#Market curve takes account of spread between SONIA and Bank rate.
Source: Macrobond, Investec
www.ukalma.org.uk Philip Shaw, InvestecA local cartoon…
Source: Daily Telegraph
www.ukalma.org.uk Philip Shaw, InvestecTHANK YOU! www.ukalma.org.uk Philip Shaw, Investec
Disclaimer
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